CFO Act Agencies' Reporting Lags

It's been 10 years since the Federal Financial Management Improvement Act was passed, and most government agencies are not meeting its requirements.
Sarah Johnson, CFO.com | USOctober 11, 2006

When President Bush signed the Federal Funding Accountability and Transparency Act into law last month, he promised that a newly created database would boost federal agencies' "accountability and reduce incentives for wasteful spending."

But federal agencies—the majority of which have continually failed audits—have had a hard time proving their accountability to taxpayers. Many of the 24 CFO Act agencies have consistently performed below par when it comes to being able to "produce reliable, useful, and timely financial information," according to the Government Accountability Office's annual report on the progress of the Federal Financial Management Improvement Act of 1996.

Ten years after the law's inception, 75 percent of the U.S. agencies are not complying with at least one of FFMIA's requirements, including meeting federal financial management systems and accounting standards.

The Accountability and Transparency Act's website is a searchable database that will break down all the grants, loans, awards, contracts, and purchase orders received by agencies by 2008. Linda Combs, the controller for the U.S. Office of Management and Budget, which is responsible for making sure federal agencies comply with the act, told CFO.com they are on track to meeting the act's requirements by January 2008.

As for complying with FFMIA, however, progress has been static. For fiscal year 1997, 20 agencies' systems were not in "substantial compliance" with one or more of FFMIA requirements, compared to 18 last year. Auditors for the Department of Homeland Security, which was added to the list of CFO Act agencies in 2004, reported that DHS's financial management systems did not comply with any of the requirements.

Other agencies gave various reasons for falling behind in 2005. They included implementing a new accounting system (Department of Energy) and having internal control weaknesses over financial reporting (General Services Administration).

The good news is that 19 agencies have received unqualified opinions on their 2005 audits, and that number has held pretty much steady since 2000. But other improvements have been slow in coming. For instance, the GAO noted in its report, "Improvements Under Way but Serious Financial Systems Problems Persist," that while the number of agencies that restated their financial statements is down from previous years, having seven that did so indicates "a continuing lack of improvement in the underlying agency financial statements."

The agencies' lack of accuracy and timeliness in their financial reporting is often blamed on the lack of integration of their financial systems. Auditors for 13 of the 18 agencies that did not comply with FFMIA in FY05 reported that integration was a problem. In fact, Coast Guard officials had to manually review three general ledger systems to integrate data, resulting in DHS getting a very late start on preparing a consolidated financial statement and inviting errors and inconsistencies into the statement that later had to be corrected.

Some agencies are also at risk for restatements because they don't do enough during the year to keep their books up to date. For example, auditors for the Department of Health and Human Services reported that monthly reports that attempt to reconcile its general ledger with the Treasury department's records were outdated.

The auditors noted that $5.5 billion worth of differences were linked to transactions dating back to 1993. Further, they found that more than 32,000 grants with net obligation balances of about $2.3 billion were eligible to be closed—and that many of them had been eligible for several years. In effect, more than 270 entries worth $208 billion were recorded outside the general ledger.

While CFO Act agencies have invested the time and money into improving their financial management systems or implementing new ones, some of their decisions have been unwise, according to the GAO. For example, the Department of the Navy spent about $1 billion on four enterprise resource planning (ERP) pilot systems that all failed to improve daily operations. The projects lacked consistency in design and effective project management oversight, the GAO reported. A new ERP project will cost $800 million.

As a result, inefficient processes and systems are making agencies miss their cost, schedule, and performance goals. For example, auditors for the Department of Energy acknowledged in FY05 that their systems did not comply with federal systems requirements and federal accounting standards.

The department had implemented a new system in April 2005 and had trouble converting data and reconciling information. An independent auditor noted specific problems with accounting for obligations, monitoring budget execution and control, and reconciling integrated contract trial balances with department records. Many reports needed for management, internal control, and audit purposes weren't available, so the department couldn't provide assurance on its financial data's accuracy.

For McCoy Williams, director of financial management and assurance at GAO, the mistakes made by some of the agencies have stalled the accountability office from opining on a consolidated annual financial report on the federal government, and he points to the Department of Defense as the biggest culprit.

Working with legacy systems, DoD has historically been unable to implement business systems on time or within budget. As CFO reported two years ago, DoD has continued to invest billions into transforming its financial and business-management processes, but as the largest single business organization, it hasn't been easy and the improvements have seemed minimal.

The reasons are plentiful: "It goes back to the issue of having stovepipe systems. It goes back to the issue of those systems not being integrated," Williams says. "It goes back to the issue of not having good policies, procedures, and internal controls in place."

One solution presented by the GAO is that DoD create a chief management officer position to oversee the department's financial management and work closely with the CFO. The person would ideally report to the head of the department, Williams says.

DoD is considering the GAO's suggestion, Williams says, and has outlined a timeline to achieve financial accountability. "Based on my involvement with the agency, it appears to me that it has been taken seriously and that there is an effort under way to achieve this," Williams says. "It's a long-term plan. The Department of Defense is a perfect example of an organization that got into this boat overnight and they definitely won't get out of it overnight."

As for other fixes to achieving clean audits across all agencies, the OMB doesn't believe the situation is as dire as the GAO may make it appear. The agencies disagree on the level of audit assurance necessary for assessing an agency's compliance with FFMIA. The GAO has continually said that a positive assurance assessment is what's mandated under the act, while the OMB believes that it would "prove only marginally useful," according to Combs in her letter to the GAO giving her opinion on its report.

For its part, the OMB revised Circular No. A-123 nearly two years ago. Mirroring the requirements of Section 404 of the Sarbanes-Oxley Act, the rules require the agencies' management to assess the adequacy of internal control over financial reporting, provide a report on material weaknesses, and write up a separate assurance statement on their internal control over financial reporting. OMB is also working on an initiative to standardize business rules, processes, interfaces, and data.

"Standardization ensures comparability and use of data across agencies through the use of common system and business process solutions, creates cost savings opportunities for agencies by making it easier to take advantage of common solutions, strengthens internal controls, and lowers the risk of modernizing agency financial systems," Combs said in an E-mail to CFO.com.

The move would improve the cost, quality, and performance of financial management systems as the agencies could take advantage of shared services, according to Combs. The administration is developing a common government accounting code, including definitions, that all federal agencies will be required to adopt.

They also must adopt new standard financial business processes, including process requirements, data requirements, and business rules. OMB will issue drafts of these standards for review throughout FY07.